tech stocks, oil, and other commodities.
Even some defenders of the industry
concede that the problem is real and po-
tentially calamitous. "There is a basis for
the argument that hedge funds add eco-
nomic value," Andrew Lo, an economist
at M.I.T. who runs his own hedge fund,
says. "At the same time, they create sys-
temic risks that have to be weighed
against those positives."
Because hedge funds use a lot ofbor-
rowed money to magnifY their bets, they
are subject to rapid reversals: the history
of the industry is littered with blowups.
This wouldn't matter much if other parts
of the economy weren't affected by the
actions of hedge funds, but sometimes
they are. In 2008, hedge funds had hun-
dreds of billions of dollars on deposit at
investment banks, which acted as their
brokers and counterparties on many
trades. When the Wall Street firms got
into trouble, a number of other hedge
funds demanded their money back im-
mediately. These demands amounted to
a virtual run on the banks and helped to
bring down Bear Stearns and Lehman
Brothers. Dalio acknowledged to me
that Bridgewater was one of the funds
that pulled a lot of money out of Lehman
and other Wall Street firms, but he said
he had little choice. "I'm a fiduciary to
my clients. My responsibility is to know
where it's risky and where it's not risky,
and to get out of the risks."
Hedge funds have also contributed to
the radical increase in income inequality.
Fifteen years ago on Wall Street, remu-
neration packages of five or ten million
dollars a year were rare. Today, C.E.O.s
and star traders routinely demand vastly
higher sums to keep up with their coun-
terparts at hedge funds. In addition to
distorting salary structures elsewhere, the
rewards that hedge-fund managers reap
draw some of the very brightest science
and mathematics graduates to the indus-
try. Can it really be in Americàs interest
to have so much of its young talent play-
ing a zero-sum game?
Rather than confronting these issues,
Dalio, like all successful predators, is
concentrating on the business at hand-
the markets and the global economic
outlook. This spring, he told me that
economic growth in the United States
and Europe was set to slow again. This
was partly because some emergency pol-
icy measures, such as the Obama Ad-
.
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Someone left a yoga student on Mrs. Clearwhistle's front stoop.
The student was tangled up and couldn't get undone from himself She
recognized him; it was Earle Slabodne. He lives up on the north edge of
town. Mrs. Clearwhistle poured some olive oil on Earle, and he slipped
right out; she called Mrs. Slabodne, who said to send him home.
Mrs. Clearwhistle did, and she didn't charge for the olive oil
.
ministration's stimulus package, would
soon come to an end; partly because of
the chronic indebtedness that continues
to weigh on these regions; and partly be-
cause China and other developing coun-
tries would be forced to take drastic pol-
icy actions to bring down inflation. Now
that the slowdown appears to have ar-
rived, Dalio thinks it will be prolonged.
'We are still in a deleveraging period,"
he said. 'We will be in a deleveraging pe-
riod for ten years or more."
Dalio believes that some heavily in-
debted countries, including the United
States, will eventually opt for printing
money as a way to deal with their debts,
which will lead to a collapse in their cur-
rency and in their bond markets. "There
hasn't been a case in history where they
haven't eventually printed money and
devalued their currency," he said. Other
.
developed countries, particularly those
tied to the euro and thus to the Euro-
pean Central Bank, don't have the op-
tion of printing money and are destined
to undergo "classic depressions," Dalio
said. The recent deal to avoid an imme-
diate debt default by Greece didn't alter
his pessimistic view. "People concentrate
on the particular thing of the moment,
and they forget the larger underlying
forces," he said. "That's what got us into
the debt crisis. It's just today, today."
Dalio's assessment sounded alarm-
ingly plausible. But when one plays the
global financial markets a thorough eco-
nomic analysis is only the first stage of the
game. At least as important is getting the
timing right. I asked Dalio when all this
wowd start to come together. "I think late
2012 or early 2013 is going to be another
very difficwt period," he said. .
THE NEW YORKER, JULY 25, 2011 65